Turkey to compensate Iraq for stolen Kurdish oil in a scheme that enriched Erdogan’s family

Abdullah Bozkurt/Stockholm

Turkish taxpayers are facing a substantial financial burden, with a staggering $1.5 billion in compensation coupled with over half a billion dollars in interest owed to the Iraqi federal government. This penalty stems from illicit oil operations, which entailed the transportation and sale of oil from Iraq’s Kurdistan region that was mainly conducted by a company owned by the family of the Turkish president.

On April 10, 2023 Iraq petitioned the US District Court for the District of Columbia to enforce a ruling requiring Turkey to compensate Iraq in the amount of $1.47 billion, stemming from Turkey’s violation of a pipeline agreement in which it was involved in the facilitation of crude-oil exports from Iraq’s Kurdistan region, despite Baghdad’s repeated objections.

Baghdad’s decision to file a lawsuit in the US District Court followed Ankara’s refusal to pay the compensation imposed by the International Chamber of Commerce (ICC) on February 13, 2023.

The penalty arising from the ICC and US federal court decisions is linked to illegal oil transactions orchestrated by Powertrans Petrol ve Enerji Tic. A.Ş (Powertrans), a company run by Berat Albayrak, the son-in-law of Turkish President Recep Tayyip Erdogan. Despite objections from the Iraqi federal government, the Erdogan administration facilitated the transportation and sale of hundreds of millions of barrels of oil from the Kurdistan Region of Iraq (KRI). This was initially accomplished on land by oil tanker and subsequently via pipelines connecting Iraq’s Kirkuk oilfields to the Turkish port of Ceyhan.

Iraq’s petition to enforce ICC award against Turkey in the US District Court:

Two pipelines, with pipe measuring 40 inches and the other 46 inches, connect Iraq’s Kirkuk to Turkey’s Yumurtalik region, facilitating the transportation of oil to Ceyhan. These pipelines were established as part of intergovernmental agreements dating back to 1973, with subsequent amendments. According to these agreements, Turkey is entitled to receive a commission for the transportation, storage and loading of Iraqi oil within its territory. Each country is responsible for operating and maintaining the sections of the pipelines that are situated within their respective boundaries.

When the Erdogan government consented to facilitating the transport and sale of Iraqi oil through contentious and opaque agreements with the Kurdistan Regional Government (KRG), directing the resulting profits to Powertrans, Iraq contested this action. Baghdad argued that Turkey had violated agreements by utilizing pipelines and storage facilities without the consent of Iraq’s Ministry of Oil. Consequently, Iraq initiated an arbitration case against Turkey and Turkish state company Petroleum Pipeline Corporation (BOTAŞ) at the ICC on May 23, 2014.

Turkey denied the accusations leveled by the Iraqi government and countered by filing a claim asserting that Iraq owes Turkey $1.3 billion in compensation for its alleged violation of the pipeline agreement.

In June 2016 the ICC determined that Iraq’s claims against Turkey were within the purview of the arbitration, excluding BOTAŞ from the proceedings. Consequently, the ICC opted to pursue the case against the Turkish government as the sole respondent to the complaint.

During the review, the Erdogan government declined to provide around a dozen documents requested by the ICC, which aimed to shed light on the nature of the relationship between Turkey and the KRG, citing confidentiality. Among the requested documents were energy agreements between the Turkish side and the KRG as well as information regarding payment procedures and the extent of discounts applied to the oil by the KRG.

It is estimated that the total value of discounts applied to KRG oil between 2014 and 2018 amounted to between $3.6 and $3.8 billion for a total of 622 million barrels of oil sold. In a letter sent to the ICC on July 17, 2017, the Turkish government not only invoked confidentiality but also claimed that it was unable to locate the documents despite its best efforts to do so.

In response to Baghdad’s renewed request, the ICC was asked to compel Turkey to provide the requested documents and demanded justification for non-compliance. Despite this, in September 2017 Turkey reiterated its stance, stating that it could not disclose the requested documents. These documents would have provided crucial insight into how the KRG sold oil at significantly lower prices than the fair market value as well as the nature of the deal between Turkey and the KRG concerning revenue sharing and the utilization of pipeline and port facilities.

The ICC proposed that Turkey engage in a Special Master process to independently assess the validity of the confidentiality claims. However, Turkey declined to participate in this process in October 2017, expressing concerns about potentially disclosing the terms of secret agreements it had entered into with the KRG. As a result of the Erdogan government’s failure to produce the requested documents, the ICC arbitrators were swayed against Turkey.

The Erdogan government employed various delaying tactics throughout the ICC process, including filing a demand for the resignation of Sir David Arthur Rhodes Williams, one of the arbitrators, in August 2022, alleging that he lacked mental capacity. However, the ICC rejected Turkey’s challenge against Sir David.

The exploitation of Iraqi oil in the KRG region by Turkey commenced in October 2012, when the KRG initiated oil exports via land transportation using trucks, facilitated by Powertrans, under an exclusive distributor and broker agreement reportedly extending for the next 50 years. Iraqi officials contended that any agreements independently made with the Kurds were illegal, asserting that the trade of Kurdish oil and gas without the central government’s consent amounted to smuggling.

However, despite objections, the Erdogan government pressed forward. In the same year, both the KRG and Turkey announced plans to construct a new pipeline, connecting to the Kirkuk-Yumurtalik pipeline, enabling the export of oil through pipelines instead of by truck.

Turkey had also executed a series of energy cooperation agreements with the KRG, providing support for the KRG’s efforts to connect its oil transport infrastructure to the 40-inch pipeline. In September 2013 with Turkey’s assistance, the KRG successfully completed the tie-in to the 40-inch pipeline, which was not operational at the time, and conducted testing over the next several months.

Beginning in December 2013 the Turkish government utilized pipeline infrastructure and storage facilities, which, according to the pipeline agreement, were designated exclusively for Iraq’s use, to transport and store crude oil pumped by the KRG. In January 2014 the KRG initiated the direct pumping of its first oil to Ceyhan, where the Erdogan government permitted the KRG to utilize the storage facilities for oil retention, despite strong objections from Iraq’s federal government.

While the KRG had already been pumping oil through the pipeline, Turkish officials conveyed to the Iraqi side during a series of meetings in January 2014 that there was no oil transfer taking place. Instead, they asserted that they were conducting hydrocarbon tests and aiming to flush out water from the pipeline.

Turkish officials further assured their Iraqi counterparts that they would halt the oil flow once the water had been flushed out and the tests were concluded. They emphasized to Iraqi officials that they would never sell Kurdish oil without explicit instructions from Baghdad.

In February 2014 the director-general of Iraq’s State Oil Marketing Company (SOMO) wrote to the director-general of BOTAŞ, instructing BOTAŞ to halt all transportation of crude oil through the pipelines. The letter emphasized that the oil stored at Ceyhan belonged to the Iraqi federal government and should not be sold without explicit authorization from SOMO. In response BOTAŞ denied any violation of the existing agreements between the two countries.

Meanwhile, Iraqi officials who were stationed at Turkey’s Ceyhan port were denied access to the facilities, constituting a breach of the pipeline agreements. Iraq sought to monitor the arrival, measurement, loading and quality of oil being shipped by the KRG at Ceyhan, but access was denied starting in January 2014. Additionally, the Turkish side imposed restrictions on information sharing with Iraqi representatives.

In subsequent letters, SOMO continued to raise objections and expressed its willingness to seek an amicable resolution while reserving the option to pursue arbitration at the ICC. Turkey, however, disregarded the proposal. On May 21, 2014 Turkey proceeded to load crude oil pumped by the KRG onto a tanker stationed at Ceyhan and sold it. Turkey’s export of Iraq’s oil without authorization from Baghdad elicited strong protests and led to the lodging of the case with the ICC.

In its complaint, Iraq sought compensation in the amount of $30.1 billion for the violation of the intergovernmental treaty on pipelines. Additionally, Iraq claimed that the sale of its oil by Turkey amounted to interference in the domestic affairs of the country.

Turkey further breached the pipeline agreement by depositing funds generated from the sale of oil pumped by the KRG with Turkish state lender Halkbank rather than the special account designated for the Iraqi Oil Proceeds Receipt Account and Development Fund for Iraq (OPRA/DFI). These OPRA/DFI accounts are held by the Central Bank of Iraq in collaboration with the Federal Reserve Bank of New York, in accordance with Iraqi law and Iraq’s commitments to the United Nations Security Council.

Furthermore, the Erdogan government began disbursing funds to the KRG in June 2014, despite having previously informed Baghdad that the funds would be deposited into an escrow account for subsequent distribution, contingent upon an agreement between the KRG and Baghdad on revenue sharing.

According to filings from the Turkish government, the KRG received $27.1 billion from oil sales. While the precise amount of this money directed to businesses linked to the Erdogan family remains undisclosed, estimates suggest it could range from hundreds of millions to potentially billions of US dollars.

The Iraqi government contended that it suffered losses from these proceeds because Baghdad would have sold the oil at a higher price than the KRG. The ICC concurred with the Iraqi government’s argument, finding that Turkey’s actions contributed to this loss. Consequently, the ICC ordered Turkey to compensate Iraq for the difference between the discounted price and the fair market value at which the federal government was selling to customers. As a result, Turkey is now liable to pay $673 million to Baghdad in compensation for the discount, bearing 50 percent of the responsibility, while the KRG was found responsible for the other half.

ICC ruling on the Iraq versus Turkey case:

Furthermore, in violation of the pipeline agreement, the KRG overpaid $1.3 billion in transportation fees to Turkey while selling oil through the pipeline between May 2014 and September 2018. The ICC ruled that Turkey must refund the excess payment to the Iraqi government as it was deemed to be a violation of the agreement.

In the end Turkey was ordered to pay total compensation of $1.99 billion to the Iraqi federal government for facilitating the sale of Kurdish oil, after the ICC deducted the $27.1 billion that Turkey had already disbursed to the KRG. However, after further deductions, including $527 million that Iraq must pay for Turkish claims regarding Minimum Guaranteed Throughput fees, transportation charges and reimbursement claims related to pipelines, Turkey’s final obligation amounted to $1.47 billion, as determined by the ICC tribunal.

The final figure provided does not include interest, court fees or lawyer fees. Turkey incurred expenses of $9.4 million, including attorney fees of $5.4 million, to defend itself against the Iraqi claims. Additionally, Turkey is responsible for covering the ICC arbitration cost of $905,000. According to calculations by Annie Emery, a managing director at Newstate Partners LLP, the interest accrued on the damages awarded to Iraq amounted to $679.7 million as of February 13, 2023, when the ICC issued its ruling. Furthermore, Emery stated that in addition to post-award interest, Turkey would have to pay an extra $25 million if it failed to settle the debt by September 15, 2023.

Expert statement by Annie Emery, a managing director at Newstate Partners LLP, on the interest that Turkey must pay on the damages: 

While the Erdogan family has enriched themselves through the illegal sale of Kurdish oil, Turkish taxpayers ultimately bore the brunt of a substantial fine amounting to $1.5 billion. When factoring in the accrued interest and the loss of revenue resulting from the illegal use of the pipelines, the overall financial burden surpasses $2 billion.

Powertrans, a newly established startup company, secured the distribution rights for Kurdish oil, facilitated by the close relations between the Erdogan family and the family of the KRG’s then-president Massoud Barzani. Trade registry data reveal that Powertrans was founded in Istanbul on March 31, 2011 by a shell company named Grand Fortune Ventures Pte Ltd and a Turkish citizen named Ahmet Muhassiloğlu.

Trade registry record for the establishment of Powertrans in 2011:

The individual orchestrating these dealings was Erdogan’s son-in-law, Berat Albayrak, who served as the CEO of the pro-government Çalık Holding before joining Erdogan’s cabinet as energy minister. Muhassiloğlu, who was also a former employee of the same company, had previously worked closely with Albayrak.

In June 2011 Muhassiloğlu transferred his shares to a company named Lucky Ventures Pte. Ltd, based in Singapore. Lucky Ventures’ management was represented by Cheung Chi Ho. Grand Ventures was represented by Andrew Gordon Galway. Then, in January 2012, another individual named Yong Ngiat Sim also joined the management team, acting as a representative for both companies.

Both ventures, initially established in 2008 in Singapore, were relocated to the British Virgin Islands a year later, suggesting that they may have been parked there for some time to facilitate illicit schemes such as profit enhancement and tax evasion.

In June 2012 Muhassiloğlu was replaced by Ahmet Sadi Güngör, a former candidate for parliament from the Justice and Development Party (AKP) who had previously worked in the Petroleum Trade Coordination department of the Çalık Group.

In April 2013 Powertrans transitioned from a limited liability company to a corporation, with three Turks brought in to manage it: Şevket Acar as the chairman of the board of directors; Ekrem Keles (Albayrak’s cousin) as the marketing and sales director; and Cem Osman Sokullu as the deputy general manager. Then, in January 2018, Acar was replaced by Muhassiloğlu as chairman of the board, and Muhsin Nezir became his deputy. Nezir, an Iraqi national from a billionaire family in the Kurdistan region, became a Turkish national in 2006.

The last recorded activity of the company’s management occurred in June 2022, with the Turkish nationals resigning from their positions and transferring the company’s management to two foreign nationals. One is an Indian national, Fuad Mosen Ali al-Sowaidi, based in the United Arab Emirates (UAE), and the other is a Yemeni national, Fousiya Abdul Razack, also based in the UAE.

Trade registry shows the current owners of Powertrans are based in the UAE: 

It is noteworthy that in July 2011 the Erdogan government issued a decision allowing the transport of crude oil through Turkey shortly after Powertrans was established. Then, on June 11, 2022, the Erdogan government granted exclusive rights for the transfer of oil to Powertrans for a period of three years. Subsequently, on June 24, 2014, the Erdogan government extended this to five years and expanded the license to include export rights as well.

The leaked emails of Albayrak in 2016, captured by leftist hacker group RedHack, revealed how Erdogan’s son-in-law was micromanaging the operations of Powertrans and deciding on small matters, from food provided to employees in the field and travel expenses to the responsibilities tasked to managers. While he was privately involved every step of the way, Albayrak publicly lied that he had nothing to do with the firm and threatened those who wrote about Powertrans with legal action.

The leaked emails also confirmed that President Erdogan’s lawyer, Ahmet Özel, also handled legal matters in Powertrans dealings on behalf of Albayrak. When an article appeared in the Turkish press in March 2015 about Powertrans, alleging government favors and Albayrak’s links to the company, Özel drafted a legal notice to the newspaper denying the allegations. Özel is partners with another lawyer, Mustafa Doğan İnal, who also works closely with Erdogan. İnal also communicated with Albayrak on Powertrans matters. İnal represented controversial Saudi businessman Yasin Al-Qadi, a close friend of Erdogan who for years was listed as an al-Qaeda financier by both the UN Security Council sanction committee and the US Treasury.

More allegations surfaced about Powertrans with regard to oil sold by the Islamic State in Iraq and Syria (ISIS), which for some time had control of oilfields in Syria and Iraq.  It was reported that some of the oil transported by Powertrans did not make it to the port for re-export but rather was illegally sold to the domestic Turkish market. The allegations that Powertrans was involved in the smuggling of ISIS oil were not investigated under pressure from the Erdogan government.